Tax Law Affects How We Buy Medical Care

January 20, 2004

The Health Savings Accounts (HSA) recently signed into law might be the most important piece of legislation of 2003. These new tax and medical insurance rules have the potential to transform health-care finances, bringing costs under control and making health care reflect what patients and their doctors really want, according to economist Martin Fedlstein.

Here's how HSAs can substantially reduce costs for a family without increasing its financial risk:

Blue Cross of California sells a traditional family policy with a deductible of $500 per member ($1,000 per family) that costs $8,460 per year.

It also offers a similar policy with a $2,500 deductible per member ($5,000 per family) that costs $3,936.

The difference in savings of $4,524 actually exceeds the maximum additional out-of-pocket that the family would face if they reached the maximum deductible per family.

A family that earned $50,000 per year faces a marginal tax bracket of 45 percent (a 27 percent federal income tax rate, 15 percent payroll tax rate and a state income tax rate of about 5 percent).

If the $4,524 premium saving was turned into taxable salary, the individual's net income would rise by only 55 percent of $4,524 or $2,488.

But when the saving of $4,524 is put into a Health Savings Account, there is no tax to pay and the funds can accumulate tax-free.

High-deductible policies give individuals and their doctors an incentive to avoid the wasteful health spending of the past. When the spending costs come from the individual's own HSA, doctors and patients have a strong incentive to balance the cost of medical procedures against the favorable impact on health.